TOURISM SATELLITE ACCOUNT PROJECT FOR CENTRAL AMERICA, 2007/2010

Tourism trends in Central America: a regional analysis, 2000-2007

World Tourism Organization (UNWTO)

Department of Statistics and Tourism Satellite Account

Madrid, October 2008

CONTENTS

Pages Introduction ............................................................................................................................. 1-3 Tourism and foreign trade ....................................................................................................... 3-8 Economic contribution of tourism......................................................................................... 8-12 Tourism and access to foreign exchange............................................................................. 12-15 Selected results of the experimental Tourism Satellite Accounts in Honduras and Nicaragua...................................................................................................................... 15-16 Final comments ................................................................................................................... 17-18

Introduction This document is one of the results planned as part of the Tourism Satellite Account (TSA) Project for Central America, 2007/2010 that the World Tourism Organization (UNWTO) has been conducting in the subregion. The Project has been designed by UNWTO and the European Commission for Latin America and the Caribbean (ECLAC) at the request of tourism ministers in the region. It is supported financially by the Ibero-American General Secretariat (SEGIB), a Spanish Agency that shares the Project's strategic vision. For UNWTO and SEGIB, the institutional strengthening promoted by the initiatives and guidelines associated with this regional effort are in line with one of the essential principles defined in their respective mandates, which is to support the consolidation of a virtuous circle between governance and economic development, in this case in the tourism sector. This vision also has the support of the Spanish Agency for International Development Cooperation (AECID) and the Central American Integration System (SICA). SICA considers the Project to be of particular interest for its member countries (Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama), from the standpoint of training and technical assistance for development, the improvement of tourism statistics, and the future introduction of TSA planned by the countries of this subregion. For its part, Mexico agreed to co-finance startup costs for the Project's first year from the Trust Fund the country provided as a voluntary contribution in order to participate in joint projects with SEGIB. The adaptation of Mexico's experience—through its Tourism Department, as well as through projects conducted jointly with the National Institute of Statistics, Geography, and Information Technology (INEGI)—was considered of particular relevance for implementation of this Project. UNWTO, as well as SEGIB, AECID, SICA, ECLAC and Mexico, agree on the need to ensure that the work and initiatives conducted to date move forward on a complementary and sustainable basis. The Project's achievements are an example of good practice in the institutional strengthening of States. They underscore the importance of tourism activity and the need to obtain reliable figures for planning and policy formulation to promote tourism in the Central American countries, by measuring its contribution to the correction of potential balance-of-payments and other economic problems. Beyond statistics, the Project has also led to the establishment of "Interinstitutional Platforms" that have allowed for an innovative, coordinated, interdisciplinary approach to the tasks undertaken, while at the same time helping to reinforce domestic institutional capacity by ensuring the highest quality response to the needs of the national group and the Project. With regard to relations between the countries and UNWTO, the executing agency for the Project, the technical staff designated as national focal points have undertaken to work in concert in advancing project objectives, with a permanent reporting mechanism in place for he purpose of monitoring progress. This represents a unique experience in regional cooperation and is showing very positive results that are being applied in each of the participating countries.

1

This document is also the start of an effort to disseminate regular analysis of performance in the tourism sector and its impact on economic growth and social development in the region. What sets this effort apart from the customary analyses of tourism activities is that it takes advantage of the statistical advances gradually being achieved through the Project, with the aim of structuring an analytical framework for the sector's short-term operational logic and the factors at work behind it, its growing importance for macroeconomic performance in the region, and its potential as a factor in alleviating poverty. Consequently, in addition to figures on the number of international visitor arrivals and tourist spending, it applies other indicators developed on the basis of information available from the national and balance-of-payments accounts, which are being continuously improved and updated. These same indicators are now permitting innovations relative to the traditional approach taken in studies on the economic contribution of tourism activity. By way of specific example, this includes tourism's contribution to the balance of external accounts and progress in the opening and widening of tourism markets. Since the Project's ultimate objective is to promote the development of Tourism Satellite Accounts in the countries of this region, the experiences of two countries with TSA (Honduras and Nicaragua), though experimental in character, will be described by way of example, with the aim of showing some basic aggregate data that are indicative of how the sector interacts with other goods- and service-producing activities. Methodological harmonization has been central to the entire Project and is essential to the establishment of performance indicators suitable for use in the context of Central American integration. This approach will help to improve decision-making by the public sector and to overcome constraints on the public and private promotion of tourism, by providing more refined figures established on the basis of international methodologies. The future entry into force of the Central American-US Free-Trade Agreement can also help to generate more tourism flows to the region, as a consequence of an expanded network of trade relations and the greater mobility of productive factors to be expected from the agreement over time. A series of public policy measures to encourage tourism investment will be required to take full advantage of the agreement, an issue of increasing interest and analysis in several of the countries concerned. It should be recalled that tourism is a tradable service that is increasingly negotiated and exchanged in the marketplace and has already been the subject of negotiation within the World Trade Organization's still unfinished Doha Round. It is precisely when negotiations lose momentum at the multilateral level that regional treaties and negotiations can gain fresh relevance. The regional forums concerned require the definition of rigorous provisions to govern the opening of different modalities for delivering tourism services. Negotiations in this area tend to become complicated in the absence of comprehensive figures and analysis, since decisions must be based on assumptions about behaviour. This places serious restrictions on the countries’ margin for manoeuvre in such negotiations.

2

This brings a new facet to statistical research on tourism, the TSA, and analysis of the macroeconomic context in terms of support for and the consolidation of the strategies defined. The strategies are also shaped by the difficult processes underway to open international service markets, in which the Central American countries are now involved and which account for a third of world trade in goods. Tourism and foreign trade Tourism has played a decisive role in the Central American countries in recent years, in terms of its contributions to basic macroeconomic balance, job creation, investment and income. It has also done its part to increase the weight of services as a component of national economies and in terms of foreign trade. Tourism activity has been consolidated as a result of political will to support tourism development; the creation of a common Central American tourism framework (“Centroamérica”); the region's recent joint marketing campaigns in international markets; the national tourism strategies developed in each of the countries; and the priority given to statistical research, which has contributed to greater knowledge about national and regional realities and the definition of appropriate tourism development policies. For the great majority of countries (which includes the Central American region) estimates of tourist expenditure have been confined to international visitors. Spending associated with the tourism activity of international visitors has traditionally been recorded as "travel" in the balance of payments. In the case of inbound tourism, nonresident visitor spending is recorded as balance-of-payments "credits", with references to "travel-generated income". Spending associated with outbound travel by residents, on the other hand, show up as "debits" and is recorded as "travel expenditure". The new conceptual framework approved by the United Nations Statistical Commission for the evaluation of tourism activity at the macroeconomic level (the Tourism Satellite Account), treats tourism activities and products as including "passenger transport". Accordingly, a better way to estimate tourism spending by resident and nonresident visitors at the international level, in terms of balance of payments, would be to add spending recorded as passenger transport to that recorded as travel. However, since the spending recorded in the balance of payments corresponds to the universe of all travellers (not all of whom qualify as tourists or day visitors) it is advisable to debug these entries to get a more precise estimate of total tourism spending. The data utilized include the total of both entries without debugging. With respect to physical visitor flows, the Central American region received a total of 8 million international tourists in 2007, an increase of 9.6% over the previous year. That rate is higher than for any other region in the world except for the Middle East and Asia and the Pacific and confirms the positive trend observed in the region since 1990. As shown in Figure 1 below, visitor arrivals increased in absolute terms by more than 3 million in only seven years. This means that while the world share of North America and the Caribbean declined and that of South America remained constant, Central America's market share rose from 0.4% in 1990 to 0.9% in 2007, reflecting the region's standout performance.

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Figure 1

1 , 9 2 , 6

4,3

6,4 7,1

7 ,7

0,7

1 , 5 3,0

4,7

5,5

6 , 3

0 0 ,

1 0 ,

2 0 ,

3 0 ,

4 0 ,

5 0 ,

6 0 ,

7 0 ,

8 0 ,

9 0 ,

1990 1995 2000 2005 2006 2007

Central America: tourist arrivals and tourism income 1990 - 2007

International tourist arrivals (millions)

International tourism income (billions of US$)

Source: World Tourism Organization. UNWTO World Tourism Barometer Volume 6, nº 2 – June 2008.

During the second half of the 1990s, annual average growth in international tourist arrivals to the region can be attributed to the positive trend observed for this indicator in such countries as El Salvador, Honduras and Nicaragua, where growth rates of 27.6%, 11.7% and 11.6%, respectively, were recorded. During the period 2005-2007, international visitor arrivals were driven primarily by the performance recorded in Panama (21.3%), El Salvador (12.2%) and Costa Rica (10.9%), as compared with the other Central American countries (see Table 1). While overall, countries in this region have grown at a slower rate over the last seven years than during the period 1995-2000, Panama, as shown below, has been the auspicious exception. It should be noted that in all cases most of these tourist flows came from other Central American countries.

Table 1 International tourist arrivals – 1990, 1995, 2000, 2006, 2007

Market share (%) Variation (%)

1990 1995 2000 2006 2007 05-04 06-05 07-06

America 100.0 100.0 100.0 100.0 100.0 5.9 1.9 4.9 North America 77.3 74.0 71.4 66.7 66.9 4.7 0.8 5.2 Caribbean 12.3 12.9 13.3 14.3 13.7 3.8 3.4 0.1 Central America 2.1 2.4 3.4 5.2 5.4 12.9 9.9 9.6

Belize 0.2 0.1 0.2 0.2 0.2 2.5 4.5 1.8 Costa Rica 0.5 0.7 0.8 1.3 1.4 15.6 2.7 14.4 El Salvador 0.2 0.2 0.6 0.9 0.9 18.5 13.5 4.7 Guatemala 0.5 0.5 0.6 1.1 1.0 9.8 14.2 2.3 Honduras 0.3 0.2 0.4 0.5 0.6 5.0 9.8 12.6 Nicaragua 0.1 0.3 0.4 0.6 0.6 15.9 5.2 6.8 Panama 0.2 0.3 0.4 0.6 0.8 13.0 20.1 30.8

South America 8.3 10.8 11.9 13.8 14.0 11.9 2.8 6.4 Source: World Tourism Organization. UNWTO World Tourism Barometer, Volume 6, nº 2 – June 2008.

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In terms of foreign exchange earnings, tourist arrivals in Central America from the rest of the world in 2007 generated more than $6 billion, 15.2% more than in 2006 (see Figure 1). It is estimated that each international visitor contributed $814 to the regional economy in 2007. Belize recorded the highest income per arrival ($1155), a figure close to the average for North America ($1312) (see Table 2).

Table 2 International tourism income – 1990, 1995, 2000, 2006, 2007

Market share (%) Variation (%)

1990 1995 2000 2006 2007 05-04 06-05 07-06

Income per arrival 2007

(millons US$)

America 100.0 100.0 100.0 100.0 100.0 9.9 6.0 11.1 1,201North America 79.3 78.7 77.6 73.0 73.1 9.3 4.8 11.1 1,312Caribbean 12.5 12.4 13.1 14.1 13.2 7.5 4.4 3.9 1,159Central America 1.1 1.5 2.3 3.5 3.7 15.6 15.2 15.3 814

Belize 0.1 0.1 0.1 0.2 0.2 27.4 18.2 15.0 1,155Costa Rica 0.4 0.7 1.0 1.1 1.2 14.5 3.7 14.0 1,001El Salvador 0.0 0.1 0.2 0.5 0.5 19.9 46.0 6.8 633Guatemala 0.3 0.2 0.4 0.7 0.7 12.9 16.6 18.4 828Honduras 0.0 0.1 0.2 0.3 0.3 11.8 5.4 14.1 670Nicaragua 0.0 0.1 0.1 0.1 0.1 7.3 12.1 10.4 319Panama 0.2 0.3 0.4 0.6 0.7 19.8 23.1 23.4 1,074

South America 7.1 7.3 7.0 9.3 10.0 17.8 16.0 19.3 861Source: World Tourism Organization. UNWTO World Tourism Barometer, Volume 6, nº 2 – June 2008.

The indicators for tourism-generated foreign exchange flows reveal that while Central America's market share remains comparatively small, the trend is positive, reflecting more dynamic growth than in the rest of the world. This is indicative of the region's dynamic potential for capturing international tourism flows. A comparison of foreign exchange earnings with other concepts shows that the Central American region has been characterized by a growing trade imbalance for goods, as compared with a positive balance for services, thanks to the significant contribution made by travel and passenger transport to the current account. Those two rubrics reflect the income generated by tourism: visitor spending in the country on the one hand, and payments for tourism transport services on the other. Together they contribute to the balance of payments current account as well as to the external account balance. Trends with respect to the foreign exchange earnings generated by inbound tourism (i.e. tourism spending by nonresidents entering the country) as opposed to outbound tourism (that by residents leaving the country) must be evaluated carefully. Both must be treated in terms of the visitor's residence. That is the basis for the international conventions on tourism statistics. Until 2004, growth in inbound tourism expenditures was markedly higher than that in the sale of goods abroad. Since then, however, this situation has been reversed, as a result of several factors. Tourist spending as a percentage of exported goods was estimated at 18.9% in 2006.

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Figure 2

Inbound tourism expenditure as a percentage of goods and service exports (%) 2000-2007

0,0

5,0

10,0

15,0

20,0

25,0

2000 2001 2002 2003 2004 2005 2006 2007* 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0

CR GT HN NI PA SV CA BC(a)

(a) The data for Belize are shown on the right. (*) The IMF has not published this information for Guatemala for 2007 Note: BC: Belize. CR: Costa Rica. GT: Guatemala. HN: Honduras. NI: Nicaragua. PA: Panama. SV: El Salvador. CA: Central America. Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

With the exception of Panama, income generated by visitors to the region from the rest of the world account for more than 50% of the foreign exchange generated by service exports. On average for the region, the value recorded for this indicator was 57.8% in 2006, slightly below the previous year. On the other hand, outbound tourism expenditure, treated as an "import" in the external account (see Figure 3), appears as a smaller figure in the current account. Purchases by residents abroad accounted for 5.4% of imported goods and 33.5% of service-generated monetary flows in 2006. In recent years, while the first indicator has shown a downward trend, the second has been on the rise. Tourism is not necessarily the decisive factor, however: in many cases, structural factors are at work.

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Figure 3

Outbound tourism expenditure as a percentage of Goods and service imports (%) 2000-2007

9,0 8,0 7,0 6,0

4,0 5,0

3,0 2,0 1,0 0,0

2000 2001 2006 2007* 2002 2003 2004 2005

CR

(*) The IMF has not published this information for Guatemala for 2007 Note: BC: Belize. CR: Costa Rica. GT: Guatemala. HN: Honduras. NI: Nicaragua. PA: Panama. SV: El Salvador. CA: Central America. Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

The limited share shown for outbound tourism can be attributed to the growing importance of imported goods within the balance and the reduced relative weight of external purchases of services. It should be noted that El Salvador is the only country for which an increase in outbound tourism expenditure was recorded for the period 2000-2006, with amounts exceeding those recorded by the other Central American countries. Outbound tourism expenditure in 2006 accounted for 8.3% and 40.3% of imports of goods and services, respectively. Other indicators providing very useful information (since they provide a clear picture of the tourism sector's importance within the balance of payments) refer to the level of inbound and outbound tourism expenditure relative to credits and debits in the current account (see Figure 4). The first indicator showed a declining trend during the first five years of the period covered, from its high point in 2004 (11%). Starting that year, it began to decline, reflecting that the purchase of goods and services and current transfers (especially remittances from expatriate workers) were beginning to increase at a faster rate than inbound tourism expenditure, reaching 10.6% in 2006. Outbound tourism expenditure as a percentage of debits to the current account appears to have evolved in a similar fashion, although the trend is not that clear. In 2006 it is estimated that out of the total income generated abroad for residents in the region, about 4.1% is attributable to foreign exchange received through tourism.

BC GT HN NI PA SV CA

7

Figure 4

Tourism as a percentage of current account (%)2000-2006

12,0

10,0

8,0 %

6,0

4,0

2,0 Outbound tourism expenditure Inbound tourism expenditure

0,0 2001 2006 2000 2002 2003 2004 2005

Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

Economic contribution of tourism Apart from those associated with tourism expenditure and external accounts, other macroeconomic indicators can be developed by combining this information with that received from complementary sources, such as national accounts. For example:

- the contribution of international tourism to the external account balance - the degree of openness of tourism markets - the extent or coverage of tourism activity

Such indicators, developed by ECLAC as part of a statistical cooperation project with UNWTO, have been used in this analysis of tourism in Central America. One such indicator is expressed as a percentage of GDP1 and measures the economic importance of international tourism activity in terms of the magnitude of the tourism surplus (+) or deficit (-) relative to the regional or national economy. The degree of openness of tourism markets2 is also expressed as a percentage of GDP and shows the importance of international tourism expenditure relative to national wealth, as measured by national accounts. A country's markets can be more open from the standpoint of tourism than from an overall trade or financial perspective.

1 The indicator is calculated as follows: [(inbound tourism expenditure – outbound tourism expenditure) / GDP] x 100. 2 The indicator is calculated as follows: [(inbound tourism expenditure + outbound tourism expenditure) / GDP] x 100.

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The degree of tourism coverage3 directly links monetary flows with tourism-motivated international arrivals and departures. This indicator will be recorded as greater than 100 if monetary flows associated with inbound tourism are greater than those associated with outbound tourism. Before presenting the findings for the first of these indicators (contribution of international tourism to external account balance), a few points with respect to the evolution of its two main components (inbound and outbound tourism expenditure) should be noted. This approach (see Figure 5) reveals that the contribution of inbound tourism expenditure4 to economic activity in the Central American countries in terms of GDP declined to 4.8% in 2001 and 2002, recovering in 2003 (5.2%) and continuing an upward trend up to 2006 (6.1%). During the period 2000-2006, only in Panama and El Salvador did spending by international visitors grow at a higher rate than national production—8.5% and 5.9% of GDP, respectively, in 2006. The country for which inbound tourism expenditure carries the greatest weight within GDP (22.3%) is Belize, which can be explained by the small size of its economy relative to other countries in the region. Costa Rica and Honduras recorded decreases for this indicator in 2006, because international tourist purchases grew at a slower pace than overall economic activity. Similar performance was observed in terms of outbound tourism expenditure,5 which now represents about 2.6% of GDP, a figure slightly above that recorded the previous year (see Figure 5). In fact, the relative weight of outbound tourism expenditure within the economies of Central America was variable and unstable in most countries during the period analyzed—rising, falling, or stagnating. While Belize (3.6%), Honduras (3.3%) and Nicaragua (3.2%) reported amounts above the regional average during the final year, they also saw declines relative to 2005. Only El Salvador, as indicated, showed an increasing and constant trend for this indicator, which has nearly doubled over the last six years—from 1.7% in 2000 to 3.3% in 2006.

3 The indicator is calculated as follows: (inbound tourism expenditure / outbound tourism expenditure) x100. 4 Outbound tourism expenditure includes spending by nonresident international visitors in connection with travel to the region. In the balance of payments such income is recorded as credits under the rubrics “travel” and “transport” and includes the purchase of goods and services in the country of destination. 5 Outbound tourism expenditure consists of international tourist spending by residents of the region in connection with travel to other countries. Such outflows are recorded as debits under the rubrics of “travel” and “transport” in the balance of payments.

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Figure 5

Inbound and outbound tourism expenditure as a percentage of GDP (%) 1995-2006

7,00

6,00

5,00

4,00

% P

IB

3,00

2,00

1,00 Outbound Inbound

0,00 2000 2001 2006 2002 2003 2004 2005

Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

As a consequence of the foregoing, foreign exchange inflows generated by international tourism have always been greater than outbound tourism expenditure, enabling the region to achieve a surplus in terms of the contribution of international tourism to external account balance, thereby contributing to balance in the current account and the balance of payments (see Figure 6). As a percentage of national production, Belize (18.8%), Panama (6.1%) and Costa Rica (5.8%) recorded the highest values for this indicator. El Salvador occupies an intermediate position (2.6%), whereas Honduras, Nicaragua, and to a lesser degree Guatemala—having overcome earlier deficits in this area—now record values fluctuating around 1.3% of GDP.

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Figure 6 Contribution of international tourism to external account balance 2000-2007

(as a percentage of GDP) 8,0

(a) The data for Belize are shown on the right. (*) The IMF has not published this information for Belize, Guatemala, and Nicaragua for 2007 Note: BC: Belize. CR: Costa Rica. GT: Guatemala. HN: Honduras. NI: Nicaragua. PA: Panama. SV: El Salvador. CA: Central America. Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

With respect to the second indicator used to measure the economic contribution of tourism, here again we see the importance of international tourism in recent years for the Central American economies. Belize, Costa Rica and Panama are the countries with the greatest degree of tourism market openness, with figures of 25.9%, 11.3% and 11.4% of GDP, respectively (see Table 3). Overall, Central American markets have been opening up, as reflected in the increased spending by international and outbound tourists. In terms of the qualitative composition of this indicator it is clear that the results are positive only if inflows exceed outflows. In a highly competitive market like tourism, public and private initiatives to attract international tourists to the region through promotion and marketing policies need to be consolidated. In terms of market positioning, the objective should be to enhance the competitiveness of the region's tourist destinations by improving the quality of products and services offered and investing in tourism infrastructure (ground and air transport, accommodation, restaurants, etc.). These efforts should also take into account the incentives required to promote domestic and intraregional tourism.

0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0

2000 2001 2002 2003 2004 2005 2006 2007* 0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 16,0 18,0 20,0

CR GT HN NI PA SV CA BC(a)

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Table 3 Degree of tourism market openness, 2000-2007

(as a percentage of GDP) 2000 2001 2002 2003 2004 2005 2006 2007* Belize 18.6 17.9 18.2 20.2 20.3 23.2 25.9 n.a. Costa Rica 12.7 10.8 10.2 10.6 11.1 11.9 10.9 11.3 El Salvador 3.7 4.6 4.7 4.6 5.3 5.1 5.2 n.a. Guatemala 6.4 6.1 6.7 7.9 8.2 8.1 7.8 7.5 Honduras 6.5 6.4 6.5 7.3 7.8 7.6 7.6 n.a. Nicaragua 7.5 7.6 7.8 8.3 8.4 9.7 10.8 11.4 Panama 5.0 5.1 5.5 6.5 7.1 7.4 9.1 9.1 Central America 7.1 7.0 7.0 7.5 8.0 8.3 8.7 n.a.

(*) The IMF has not published GDP data for Belize, Guatemala and Nicaragua for 2007. Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

It should be noted finally that during the period analyzed, the foreign exchange obtained through inbound tourism expenditure made it possible in turn to finance tourism expenditure by residents abroad. While the degree of tourism coverage contracted in 2002, it later recovered and reached its highest level in 2006 (235.9%). As shown in Table 4, Belize, Costa Rica and Panama were the frontrunners for this indicator.

Table 4 Degree of tourism coverage, 2000-2007

(as a percentage of GDP)

2000 2001 2002 2003 2004 2005 2006 2007* Belize 249.9 248.0 254.2 300.0 363.1 477.9 624.4 641.5 Costa Rica 268.0 308.1 300.6 328.0 330.1 325.5 327.4 304.4 El Salvador 230.8 220.7 197.0 172.8 177.0 176.6 176.2 n.a. Guatemala 136.1 126.8 140.1 135.7 139.7 145.0 145.1 147.2 Honduras 101.7 105.9 107.4 115.6 124.1 127.6 134.9 131.1 Nicaragua 260.1 293.2 281.8 301.6 307.5 285.6 359.4 393.1 Panama 199.5 182.8 195.6 213.5 200.6 195.2 181.0 167.9 Central America 222.0 228.7 223.3 228.4 229.2 230.1 235.9 n.a.

(*) The IMF has not published GDP data for Guatemala for 2007. Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

The combined performance of the three indicators analyzed above confirms that international tourism plays an important role in general macroeconomic performance, and that its development and promotion can have a positive impact on key national economic variables and social configurations (to the extent that international visitor demand is met to a significant degree through the production of goods and services by national businesses). Tourism and access to foreign exchange External relations are among the key determinants of macroeconomic balance and stability, as reflected in the current account and capital components of the balance of payments, and ultimately in the level of international reserves.

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The current account balance is essentially a reflection of trade in goods and services. The capital account balance reflects inflows and outflows of capital, in terms of assets and liabilities. Other sources of foreign exchange earnings include, for example, expatriate remittances, which are also very important for the region. Tourism is a tradable service in international markets and and shows up, as mentioned before, as a country's surplus or deficit relative to other countries. For example, if tourist arrivals and expenditures for travel on national airlines exceed departures and outbound expenditures, their relative weight will be clear in the current account balance, and thus in the balance of payments, which has several implications. The more tourism generates foreign exchange inflows, the more it can contribute relative to sales of traditional goods, like bananas, coffee, cacao, shrimp, etc.—essential products in the Central American export basket. This situation came into strong focus in the region a few years ago, as tourism-generated foreign exchange began to exceed, in several cases, that generated by those traditional activities. In several countries of the region, tourism ranks, if not highest, at least second or third highest as a generator of foreign exchange, confirming its essential role in achieving a positive balance of payments. This makes it a valid exercise to compare trends in foreign exchange generated by tourism with trends for such variables as remittances or traditional and non-traditional exports, for which basic information is available. Expatriate worker remittances to the region, for instance, represent a vital source of income for Central American economies as well as an important balance of payments component. Moreover, such income is presumed to have a countercyclical impact on economic activity: increasing during recessions, it helps to cushion the adverse effects of economic shocks. The relationship between tourism and remittances is captured by the magnitude of these flows, associated with the migratory phenomenon observed in the Central American region. In political economy terms, it can be concluded that over time, the promotion of tourism could provide a means to retain economically active populations in their home countries, with all of the additional benefits that would accompany such an outcome. On the other hand, the rising trend observed for remittances explains the declining relative weight of inbound tourism throughout the period 2000-2006—to 51.6% in 2006 for the region as a whole (see Figure 7). The highest values for this indicator were recorded by Belize and Costa Rica (over 380%) and Panama (over 1000%) because of the relatively limited weight of remittances within their economies.

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Figure 7

Inbound tourism expenditure as a percentage of emigrant remittances (%) 2000-2007

120 4500

(a) The data for Belize, Costa Rica and Panama are shown on the right. (*) The IMF has not published this information for Guatemala for 2007 Note: BC: Belize. CR: Costa Rica. GT: Guatemala. HN: Honduras. NI: Nicaragua. PA: Panama. SV: El Salvador. CA: Central America.

Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

This is also the case of investment flows: inbound tourism expenditure relative to net foreign direct investment6 declined during the period analyzed, reaching its lowest level in 2006 (119.3%). This trend is attributable to faster growth in such investment relative to the monetary flows derived from inbound tourism. For the final year, the country recording the highest value for this indicator was El Salvador (431.9%), where net foreign direct investment remains quite limited. The percentage for Panama, on the other hand, was 56.3%.

6 This consists of direct investment in the country, not counting direct investment by expatriates, including the reinvestment of profit.

0

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0 2000 2001 2002 2003 2004 2005 2006 2007*

GT HN NI PA(a) SV CA BC(a) CR(a)

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Figure 8

Inbound tourism expenditure as a percentage of Foreign Direct Investment (%) 2000-2007

800 1000

700 500

600

0 500

400 -500 300

200-1000

100 0 -1500

2000 2002 2007* 2001 2003 2004 2005 2006

CR GT BC(a) HN NI PA

(a) The data for Belize are shown on the right. (*) The IMF has not published this information for Guatemala for 2007 Note: BC: Belize. CR: Costa Rica. GT: Guatemala. HN: Honduras. NI: Nicaragua. PA: Panama. SV: El Salvador. CA: Central America. Source: Prepared by ECLAC based on The Statistical Yearbook for Latin America and the Caribbean, 2007 and data provided by the IMF (published in “Balance of Payments Statistics. International Financial Statistics”).

Selected results of the experimental Tourism Satellite Accounts in Honduras and Nicaragua As part of the project Tourism Satellite Account for Central America, 2007/2000, refinements were made on the basis of experiments conducted in Honduras and Nicaragua, with similar exercises planned in other Central American countries for the second year of the Project (the Central Bank of Guatemala, for instance, is making significant progress toward completing a similar exercise). The need to improve the statistical databases of some countries has also been confirmed, and has been addressed by countries jointly since November 2007, when the Project began. The TSA is a tool permitting the impact of tourism on the general economy to be quantified on the basis of methodological guidelines for the national accounts and balance of payments. It uses the same concepts, defines categories for products and economic activities based on the specificities of the sector, and results in the generation of similar indicators, such as an activity's Gross Value Added—total and by tourism industry segment; the extent to which different forms of tourism (inbound, domestic and outbound) contribute to that aggregate; intermediate consumption by tourism industries; the composition of tourism expenditure by principal rubric; etc. The results of these exercises in Honduras and Nicaragua are shown below.

SV CA

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Table 5 The experimental Tourism Satellite Accounts of Honduras and Nicaragua

Honduras Nicaragua Main aggregates (%)

2006 2007 2006 2007

Distribution of expenditure 100,0 100,0 100,0 100,0

- inbound tourism 34.7 33.7 33.9 33.8

- domestic tourism 42.7 44.9 35.4 36.4

- outbound tourism 22.6 21.4 30.7 29.8 Economic contribution - tourism value added / total value added

(GDP) 5.4 4.9 4.9 4.8

- value added by tourism-related sectors / tourism value added 66.0 64.0 66.0 67.0

The table above shows that the weight of tourism within the national economy of both countries is, on average, over 5%, which shows its growing economic importance in the countries analyzed. It is also noteworthy that the greatest impact comes from domestic tourism, which exceeds inbound and outbound tourism in both countries. This suggests that in addition to efforts to attract international tourists, for the reasons analyzed elsewhere in this study,7 greater promotion of domestic tourism is also necessary. Industries directly related to, or characteristic of, tourism have consistently contributed the most to the results indicated. Such activities as accommodation, various forms of transport, travel agencies, tourist equipment leasing, and similar activities, contribute more than any others to the generation of national tourism-related wealth. "Non-characteristic" industries—the ones less closely associated with tourism—also contribute but to a lesser extent. It can be seen that the aggregate figures shown for Honduras and Nicaragua are more meaningful analytically than the macroeconomic indicators used in the subchapter on "the economic contribution of tourism". Consistent with that finding, ECLAC and UNWTO are acting in concert to promote TSA as part of their regional cooperation project. Pending completion of the aforementioned exercises, both organizations are encouraging countries to use the available "Meso-economic" indicators (which include more than the three referred to in this first report) as a means of promoting macroeconomic analysis of tourism.

7 This evidence is not exclusive to Honduras and Nicaragua; it comes from the Tourist Satellite Account exercises underway in recent years in more than 60 countries. It represents one of the basic benefits being derived from this instrument for measuring the economic contribution of tourism, which as its name suggests has been developed for the purpose of sharing concepts, definitions, classifications and results tables with the national accounts system—revolving in "satellite" fashion around the System of National Accounts of 1993.

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Final comments The relationship that exists between income derived from international tourism expenditure and economic growth is clear. Tourism's capacity to drive growth and exert a multiplier effect on related economic branches makes it a key economic sector. So closely is its performance connected with the macroeconomic context and regional stability that tourism-related inflows and outflows of foreign exchange—so adversely affected at the beginning of this century—staged a successful recovery thereafter, and continue contributing unmistakably to macroeconomic stability in the region (see Figure 9). In countries like those of Central America, which face challenges in terms of competitiveness and export diversification as well as negative current account balances, tourism represents an important source of foreign exchange with which to restore balance of payments. The effects of tourism, as observed, are not confined to the economic sphere; they extend to the social and labour fields as well, helping to redistribute income across population segments and geographic space, and provide a significant source of jobs and new firms that are enriching and consolidating the business fabric in each country.

Figure 9

GDP growth, inbound and outbound tourism expenditure (%) 2000-2006

20%

15%

10% %

5%

0% 2000 2001 2006 2002 2003 2004 2005

-5% Producto Interno Bruto Gasto turístico emisor Gasto turístico receptor

Source: Prepared by ECLAC based on IMF data (published in “Balance of Payments Statistics. International Financial Statistics”).

In the present economic context, despite the elevated prices for raw materials, food and oil, tourism demand is still expected to grow, albeit more slowly and as a function of economic conditions. The role of public and private policies as a stabilizing force, as well as a means to promote tourism itself, will therefore be crucial. It will also be essential, in developing the region's tourism sector, to take advantage of Central America's comparative advantages in terms of culture, biodiversity, and historical and cultural attractions. More than a general goal, this represents a feasible challenge for Central America, which stands to transform its enormous tourism potential into a relevant factor of growth.

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A wide range of conditions in the region position it well to contend effectively with the effects of a slowing international economy, and in particular a decline in demand from the United States. There is certainly nothing to suggest that the sector will suffer a destabilizing disruption in 2008 or 2009; its contribution to economic growth can thus be expected to remain, at the very least, stable. It can also be expected that high oil prices will gradually moderate and that the destabilizing factors observed in recent months will give way to gradual recovery under conditions that can be expected to strengthen the Central American tourism market.

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